“Actual Malice” Required for Breach of Contract Claim
A company that provides credit rating services under a contract with a public company has a constitutional right to be protected against breach-of-contract claims for failure to do its job in a workmanlike manner, unless the client can prove “actual malice.” That’s the word from the U.S. Court of Appeals for the 6th Circuit, which becomes the first appellate court to decide that breach-of-contract claims that result in harm to reputations must satisfy the stringent standards applied to defamation cases.
In the case, Compuware Corp. v. Moody’s Investor Services, Compuware retained Moody’s to rate its debt. Moody’s issued an unfavorable opinion, lowering Compuware’s debt to junk status. Compuware sued on several grounds, including defamation, negligence, and breach of contract. Moody’s won summary judgment on all counts. With respect to the contract claim, Compuware argued that Moody’s breached its contract by “incompetently compiling, investigating, and evaluating Compuware’s credit position.” In doing so it relied on Michigan’s implied covenant that one providing services under a contract will perform in a workmanlike manner.
But the court, in a 2-1 decision written by Judge Alice Moore Batchelder, found that credit rating services were precisely the sort of thing that the Constitution was designed to protect. Focusing only on the written language in the agreement, the court noted that Moody’s had, in fact, satisfied the contract, because it was only required to deliver “a credit rating” (emphasis in original) not an accurate or workmanlike one. Since, reasoned the court, Compuware was relying on the implied covenant to perform in a workmanlike manner, and that obligation is very similar to negligence, and negligence is a tort, and defamation is also a tort (follow?), the breach of contract in question had to meet the tort standard for defamation.
Interestingly, the court drew a sharp distinction between express contractual obligations and those implied in fact or law. The court repeatedly emphasized that Moody’s undertook no express duty to do its analysis in a reasonable or workmanlike manner. If it had, the court suggested, the result might be different. For the court, implied contractual duties are not really contractual, and thus ought to be treated more like torts.
On its contract claim Compuware sought only rescission of the contract and refund of the more than $200,000 it had paid to Moody’s, but it was out of luck. The court found that Moody’s had a constitutional right to keep the payments even if it had botched the rating.
In a partial dissent, former Kentucky law professor John M. Rogers noted that constitutional rights can be contracted away, and so a contract to provide only opinions that are soundly researched and well-grounded ought to be enforceable. He seems to have differed from the majority by considering the implied covenant to be an ordinary part of the contract.
[Frank Snyder]